Highlights

• Hosts investor’s briefing. Yesterday, we attended Kimlun’s investor’s briefing which was represented by its CEO, Mr Sim Tian Liang and CFO, Ms Vennessa Yam. The meeting was well attended with a crowd of around 50 fund managers and analysts.

• Margins to normalise. To recap, despite revenue declining -17% YoY in 1H, earnings grew +39% thanks to margin expansion. Management indicates that margins are likely to normalise downwards going forward due to (i) completion of high margin construction jobs, (ii) high start -up cost for the Pan Borneo Highway contract and (iii) segmental box girders (SBG) for MRT2 will kick in which generally commands lower margins, albeit a high contract sum.

• Orderbook near highs. Kimlun has managed to secure RM1.3bn worth of new jobs YTD (construction: RM1.1bn, manufacturing: RM220m) vs RM1.2bn in FY15. This brings its orderbook to near high of RM2.2bn (construction: RM1.9bn, manufacturing: RM300m), implying 2.1x cover on FY15 revenue.

• Potential job wins. Management is aiming to add another RM200-300m worth of new contracts for the remainder of FY16 and another RM800m in FY17. These potential job wins could likely stem from (i) the LRT3 where it has been prequalified for both the construction and precast roles, (ii) affordable housing under PR1MA and PP1AM in which it has already submitted some bids and (iii) the Central Spine Road. Kimlun has also successfully reduced its job flow dependency on Iskandar in view of the slowdown there. Currently, 45% of its construction orderbook is located outside Iskandar, compared to only 10-20% previously.

• More from MRT2. Kimlun is currently undergoing the tender process to supply tunnel lining segments (TLS) for the MRT2. Recall that Kimlun was 1 of the 2 sole TLS suppliers for the MRT1. Based on the longer underground stretch for the MRT2 at 13.5km vs 9.5km for MRT1, we estimate that Kimlun should be able to secure a TLS contract worth at least RM69m, potentially boosting its manufacturing orderbook by +23%.

Risks

• Iskandar slowdown hampering new job wins.

Forecasts

• We cut FY17 earnings by 4% but raise FY18 by 2% (FY16: unchanged) on some minor model housekeeping.

Rating

• Maintain BUY, TP: RM2.48

• Kimlun is a prudently run construction outfit that has managed to successfully reduce its dependency on the Iskandar property market by tapping on to other contract avenues.

Valuation

• We raise our TP slightly from RM2.44 to RM2.48 as we roll forward our valuation horizon from FY16 to mid-FY17 at an unchanged P/E target of 11x (mean).

Source: Hong Leong Investment Bank Research - 22 Sep 2016